Tax Analysts provides news, analysis, and commentary on tax-related topics, including Transfer Pricing. Transfer pricing establishes valued for transactions between related parties. Under the most widely accepted framework, the arm’s-length standard, transactions between related parties are priced as if they had been entered into between unrelated parties acting at arm’s length. The pricing can be determined through any of a number of methods such as the comparable uncontrolled price (CUP) or transactional net margin method (TNMM).

In the United States the arm’s length standard has been codified as section 482. In addition to the arm’s length standard, section 482 establishes that income from intangible property are to be commensurate with the income attributable to the intangible.

The Organization for Economic Cooperation and Development issues the Transfer Pricing Guidelines for Multinationals and Tax Administrations. The OECD Guidelines are based on a consensus of the OECD member states. The OECD’s base erosion and profit shifting project action plan included several action items to address transfer pricing issues.

A competing theory of transfer pricing would replace the arm’s-length principle for pricing intercompany transactions with a system of formulary apportionment in which income would be divided between entities based on a set of factors.

Controversy in transfer pricing often arises from the pricing of royalties for intellectual property, cost-sharing arrangements, intragroup financing, and guarantee fees. One method for reducing possible controversy is to enter into an Advance Pricing Agreement with tax authorities. Both unilateral APAs and bilateral APAs are possible.

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